How Mhow, Silvassa and Rewa emerged as hotspots for Indian hotels

Demand for hotels and resorts in small cities and towns, especially those categorized as tier 3 and 4, is climbing at an unprecedented rate.

Cities such as Mhow, Silvassa and Rewa, which offer attractive investment opportunities at lower land acquisition and operational costs, are emerging as compelling destinations for a good number of hospitality companies.

Major hotel chains including Marriott International and Tata-owned Indian Hotels Co Ltd (IHCL) are making strategic entries into these markets. Marriott opened its 150th hotel in the pilgrimage city of Katra, in Jammu and Kashmir, and IHCL revived its Gateway brand for this new frontier.

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The Radisson Hotel Group, which already has more than half of its portfolio in tier 2 and 3 markets, recently launched a hotel in Gopalpur in Odisha.

“We recognise the burgeoning potential in tier 3 and 4 cities, and our recent signings and upcoming pipeline are a testament to that," said Nikhil Sharma, managing director and area senior vice president, South Asia, Radisson Hotel Group.

Radisson has signed agreements to open new hotels in destinations such as Chail in Himachal, Raipur in Chhattisgarh, Sonipat in Haryana, and Vrindavan in Uttar Pradesh. It is also expanding its Park Inn and Suites by Radisson brand in southern India with new hotels across Kerala, including at Guruvayur and Ambalavayal.

EIH, the owner of Oberoi Hotels, too, plans to expand into tier 3 locations, managing director and chief executive Vikramjit Singh Oberoi had said earlier.

EIH’s future projects include a mix of owned and managed properties, such as a palace near Khajuraho, the Rajgir Palace in Madhya Pradesh, and a jungle resort in the same state.

“Based on the company’s data, these cities give a yield of about ₹4,000-6,000 a night, which is reflective of the market demand, competition, and cost of living in these regions," said Ajay K. Bakaya, managing director Sarovar Hotels. “But there is a relatively lower land cost (not substantially though) and so investors can expect better return on investments."

Bakaya is also director at Louvre Hotels India, which recently signed hotels in Kota, Rajasthan; Mhow in Madhya Pradesh; and Mathura in Uttar Pradesh.

Rising Stars

Ishaan Koul, director, Naaz Hotel Consultants, is actively engaging with this new reality. His company has been inundated with inquiries for feasibility studies and asset management, some for the most obscure of locations.

For instance, Talcher, a subdivision of Odisha’s Angul district, is on his itinerary, with upcoming trips planned to Ujjain in Madhya Pradesh and Nathdwara in Rajasthan. Places such as Silvassa, Jabalpur, and Rewa are also attracting similar attention.

Talcher is a mining town likely to draw business travellers, while Ujjain and Nathdwara are known for their religious and cultural significance.

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Most of the inquiries are from hotel owners or potential hotel owners who reside in these cities and are eager to capitalize on the hospitality boom, seeking detailed feasibility studies for the land they have in mind, said Koul.

In financial year 2023-24, such small cities and towns accounted for 52% of new hotel developments, according to a recent report by hospitality consultancy HVS Anarock Hotel Advisory Services, with a notable pivot towards upscale and luxury segments. 

Hotelivate, another hospitality consultancy, estimates that out of 30,000 new hotel rooms signed across 128 cities in India last year, tier 3 cities accounted for nearly half, with 14,000 rooms.

"The aspiration of owning ‘branded’ hotels has gone beyond big cities now," said Koul. “Owners did not necessarily want brands to be running their hotels a decade ago, but instead they wanted to develop their own brands and run them as unbranded properties. Today that has changed."

Hospitality boom

Looking ahead, Hotelivate anticipates an evenly split growth trajectory between domestic and international operators in the small towns and cities, focusing on upscale to luxury hotels which make up 44% of the planned developments. Interestingly, leisure sectors are seeing a boom, with 16,000 rooms in the pipeline, reflecting a rising trend in travel and enhanced connectivity.

This transformation extends beyond individual operators.

Shree Naman Group, co-owner of Sofitel in Mumbai, is venturing into remote areas like Pavna in Maharashtra to develop luxury resorts, reflecting a broader trend of development in these locales.

Pavna, located less than an hour's drive from the popular tourist destination of Lonavala, features a picturesque lake but has a noticeable shortage of luxury resorts. With its favourable weather and improved expressway connections, the company expects it to attract city dwellers from Mumbai and Pune, boosting its potential as a desirable getaway.

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"The culture of driving holidays in recent years, and better road connectivity has really accelerated the growth of tier 3-4 cities and so leisure resorts are becoming far more lucrative and attractive to develop," said Harsh J. Shah, vice president, Shree Naman Group.

The interest is not limited to local stakeholders.

Property consultancy JLL’s hotel division has seen a diverse range of investors from various sectors driving a significant build-out in tier 2 and 3 markets.

Jaideep Dang, managing director of the hotels and hospitality group at JLL India, said the division has developed around 2,000 rooms across tier 2 and 3 markets, involving an investment of about ₹3,500 crore. Notably, nearly 750 of these rooms, costing around ₹1,000 crore, are located in tier 3 cities.

Dwindling availability

The growing demand for hotels in tier 3 cities also presents a significant opportunity for hotel operators and management companies, which are increasingly focusing on smaller markets due to dwindling availability of hotel assets in larger cities.

As a result, companies are actively expanding their presence to increase their portfolio of managed properties.

Naaz Hotel Consultants, for example, has extended its services to include asset management, overseeing the financial performance of hotels in Jhansi and Aligarh.

According to Koul, these locations have shown remarkable year-on-year growth in average daily rates and occupancies. Interestingly, unlike their counterparts in major cities, these hotels derive a significant portion of their revenue from food and beverages, spurred by India’s booming wedding market.

"Among the clients we advised last year, several are constructing hotels in locations such as Tirupati, Shirdi, Silvassa, Jabalpur, and Rewa," said Nikhil Shah, senior director of hospitality, capital markets and investment services at consultancy Colliers India.

“Interestingly, all of these have been partnerships with international brands. The majority of hotel owners that we work with, in tier 3 and 4 cities are locals, with the exception of pilgrimage destinations, where owners typically are from larger cities."

North India leads

Geographically, northern India led new hotel signings last year, capturing over 43% of the market share, followed by the West at 28%, the South at 17%, and the East at 12%, as per data from Hotelivate.

The fourth quarter of FY24 saw the highest activity, with more than 10,000 rooms signed. This resulted in a substantial number of hotel openings, with about 190 new hotels providing over 12,000 rooms across 113 cities, said Hotelivate.

The majority of these properties were mid-market and upper mid-market hotels, predominantly opened by domestic operators who introduced around 8,000 keys, compared to the 4,000 introduced by international operators, it added.

The Radisson Hotel Group and IHCL are reflective of this broader trend.

"We strongly believe that these are promising markets for us, owing to an increasing appetite for quality and branded accommodation, a readily available workforce, and improved infrastructure, particularly last-mile connectivity, making these destinations more accessible and attractive for businesses and tourists alike," said Radisson's Sharma.

Similarly, Lemon Tree Hotels is focusing on tier 3 and 4 cities, with 49 of its 57 upcoming properties located in less urbanized areas such as Kundapura in Karnataka, Sri Ganganagar in Rajasthan, Erode in Tamil Nadu, and Chirang in Assam.

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International hotel chains are not shying away from smaller cities either.

Accor, which has brands like Pullman and Sofitel, intends to focus more on expanding its presence in cities such as Bhopal, Indore, Bhubaneswar, and Amritsar, a company spokesperson had earlier told Mint.

All said, experts recommend caution.

The hotel industry’s rapid expansion at a 7.5% compound annual growth rate, compared to the previous decade's 5.6% CAGR, may create supply pressures, said Koul.

He suggested that with strategic location selection, the typical return on capital employed for a hotel can be achieved within about 10 years, a feasible timeline given the lower land costs in smaller cities.